The Benefits of "Gouging"

Whenever there is a natural disaster (more often than not it seems to be a hurricane in Florida), the media decry the inevitable rise in prices that strike the affected area.  This is viewed as villainy by those charging inflated prices; the term of gouging is inevitably bandied about and some government official threatens investigations and prosecutions.  They do not realize that what they describe as 'gouging' is really a market signal to get more supply into the region quickly.

Let us consider.  Suppose that Florida is expecting a hurricane and suddenly every home owner rushes to the local Home Depot to buy ply wood to cover windows, and the local supermarket to stock up on supplies, and Radio Shack to get lots of batteries.  The problem is that there is not enough to go around.  These businesses do not have stock on hand to provide the supply demanded.  Worse, some home owners will, if the prices are unchanged, buy far more than they really need, perhaps even with thoughts of reselling at a profit to neighbors who weren't first in line.  A rise in the price forces consumers to only buy what they need for the immediate crisis and also allows the existing supply to provide for more people.

For example, suppose that Joe and his family are going to leave the area.  They plan to drive up to Georgia and wait for the storm to pass.  Though Joe has enough gas to get out of the affected area, if he sees that the gas price is unchanged he might be tempted to top off his tank.  If too many drivers did that, the people with empty tanks might find themselves stuck in the storm's path.  Now, if the price doubled, Joe would certainly not get gas when he has plenty to get to someplace with less expensive gas thus preserving gas for Tom, who is running on empty.  Tom will not fill his tank at the inflated price but will get enough to escape.

The hiked price has another benefit.  Jim in Georgia sees that bottled water is selling for double in Florida.  Thus, he buys as much as he can carry and heads south.  Yes, Jim is profiting but he is also providing the desperately needed product.  Had the price not risen, Jim wouldn't be rushing in with added supply.  Capping the price is a sure way to cause massive shortages.

Price is a market signal.  If the price goes up, it tells people that supply was insufficient to meet the demand at the lower price.  It also encourages others to enter the market and increase the supply.  It should be noted that such spikes in prices in localities are always temporary because in the long run, the market will adjust to a higher consumption and drive the prices back down.  'Gouging' only happens in the short run and brings more benefits than costs.